Who wins in the Chinese market: the game theorist or the diplomat?

Bhaskar Chakravorti: I was reading about one of several trips that Jeff Immelt, the CEO of General Electric, had made to China. It was in the wake of negotiations that GE senior executives had with the Chinese authorities on their requirements regarding local sourcing and using Chinese suppliers as part of their policy to promote “indigenous innovation”. Essentially, the Chinese authorities were negotiating to get GE to comply by not only using the lever that they would lock GE out of the Chinese market, but potentially they could even lock GE out of the African market. They were playing this global game with GE. Jeff Immelt could borrow from the ambassador’s playbook or from that of a highly competitive CEO. So the question is: are you better off as a diplomat or as a game theorist in order to win in the Chinese market?

Jon Brookfield: I like this question. I think it is fun. When I first saw this question, it seemed important to me to think about what we mean by game theorist and what we mean by diplomat. Game theory is really a sub-field of mathematics (even if economists have appropriated a good portion of it because of its utility in an economic context). Diplomacy is the art and practice of international relations (and may also be thought of as a kind of tact or skill in dealing with people).

If you see it at that level, then it seems quite straightforward who will win in the China market. It will be the diplomat. You have mathematics on the one hand, which tends to be a very formal and often abstract system. On the other hand, there is someone who dives into things in terms of practice and people – a good set of skills for the China market. Of course, it depends on how exactly you think about what it means to be a game theorist or diplomat. I’ve just drawn it as a story of contrasts, but I think that that’s overreaching a bit. I don’t think diplomacy and game theory are in opposition to each other, and you can see that in a couple different ways.

For example, just look at the nature of The Fletcher School. One of the purposes of Fletcher is to provide diplomatic training for those that will go into foreign service, both in the United States and abroad. If we think about Fletcher’s intellectual food groups, we’ve got law, we’ve got politics and diplomacy, we’ve got economics, we’ve got international business. That’s all part and parcel of a well-prepared diplomat’s training. With part of that training being economics, and part of economics being game theory, it’s hard to say, at least at Fletcher, that they’re in opposition.

Game theory can offer several insights into good business practice. If you think about end games, for example, the question of what you want and what you can see becomes: can you see an outcome that actually works knowing the configuration of players and interests? That is a lesson from game theory being applied to business practice and is an important way to think about the Chinese market. It also happens to be very similar to the way that some people conceptualize politics (a key part of the diplomat’s toolkit). If you think about politics, some have called it the art of the possible. Well, thinking about that and endgame planning, there’s a lot of overlap between those two ideas.

I was reading Lucian Pye (the sinologist and political scientist) who was quoting Bernard Crick (the political theorist), who was, in turn, paraphrasing Aristotle – so this goes way back. Roughly the comment was that politics is a great and civilizing human activity – precisely because it’s an activity through which contending interests are conciliated and differences reconciled. Again, that has a flavor of the art of the possible.

While there is a characterization of game theory and diplomacy that sees them as quite different and at that level they’re going to have different implications, thinking about each of them more deeply, they seem to share a lot of the same areas of inquiry and frameworks for thinking about solutions. From that perspective, I think both approaches can be useful for understanding the China market. With a good understanding of politics, the diplomat seems pretty well positioned. With a framework that is reasonably amenable to understanding political processes, the game theorist should also be okay.

Of course, Lucian Pye would say that China has never developed a genuine political process, the potential for interest articulation and hence real politics having been stifled. According to Pye, in imperial and also communist China, rulers are supposed to take care of everyone’s interests, so nobody is supposed to advance any particular interest.

Now, if based on the above characterization, I say that there is no politics in China, that’s kind of an odd statement, especially given that most observers see China as an intensely political place and good business-government relations as important to business success.

So how do we reconcile those two opposite conceptions? Pye’s point, roughly speaking, is that China is interesting because they have administration without the rule of law, and they have politics without interest articulation. Now this doesn’t mean politics disappears. It just means it’s a different kind of politics, and the way that’s usually encapsulated is in a single word: guanxi. It’s the politics of personal relationships and interconnections – that’s where much of the substance is.

Now if you’re interested in relationships and interconnections, Fletcher is a pretty nice place to be. I have a business school background, and with that often comes a view of the world that sees things in terms of functional food groups: you’ve got marketing, you’ve got accounting, you’ve got finance. That’s the way you’ll see the world from a traditional MBA. In contrast, if you’re at a school of international affairs, often what you get is kind of a high politics view of the world. Both are useful, but what is so nice about Fletcher is its willingness to engage in the messy middle. Here you get to think about how politics gets expressed in business and vice versa.

BC: Well, that’s certainly very thought-provoking and I think it is interesting that you suggest that there’s actually a false dichotomy between the game theorist and the diplomat. There is indeed an overlap between a successful game theorist and a successful diplomat. The game theorist looks ahead and anticipates the reaction to the action taken. Part of the actions taken may involve elements of diplomacy, because perhaps they anticipate that a politically astute overture may generate reactions that are beneficial. Similarly, a successful diplomat thinks through the second and third order effects of the overture that they make.

One direction I would take this, then, is why do we ask this question in the context of China? Is China that different from, say, Germany or France or India?

JB: That’s a fair question and actually speaks to some of my current research. It’s a question of how you situate China in a larger context. Over time, there have been stories of exceptionalism in Asia, as in Japan. It’s just different. Similarly one could make a bold statement along those same lines. China: It’s just different. Of course, this begs the question: why?

There’s a wonderful conversation around people trying to understand the Chinese experience by analogy, by structured comparison. One classic comparison is China versus the old Soviet Union: Big Bang versus gradualism. Another way is thinking about the People’s Republic of China and how it fits into a story of East Asian developmental capitalism – a China to Japan or South Korea comparison. Yet another lens is thinking about the PRC as a Chinese economy, looking at a comparison of China to Taiwan, Singapore, or Hong Kong. Economically, you could possibly see Hong Kong as a canary in the coal mine. Others are comparing PRC to India, or Brazil. So there are a lot of rich and interesting comparisons and some commonality between the Chinese experience and a number of other experiences. Given all that, I’m hard-pressed to say the Chinese case is unique, because in lots of different pieces you’re going to hear echoes of other experiences.

That said, something that’s important in the PRC is the centrality of political organization. Because the PRC has a legacy of a totalitarian system, that affects the overall society, and it’s not like what you would expect to see in the United States or a number of other countries. Because of the existence and centrality of the Chinese Communist Party, most analyses of the PRC need to focus on business-government connections in a way that you might not have to in some other economies (although, even that assertion is a bit overstated if you think about Fall 2008 in the United States. As an investor, if you want to understand what happened between then and the Spring 2009, if you don’t attempt a political story, there’s basically now way to understand what actually happened).

Are Western and Chinese economies converging?

BC: Let me ask you a final question. It has to do with an issue that is useful regardless of whether you are a game theorist or a diplomat because it helps you get a better read of the other party: this is the issue of symmetry. Consider the dynamics of competition between, say, IBM and HP or Coca-Cola and Pepsi. What tended to happen was that the major actors, in the process of competing with each other, started resembling each other; each wanted to have a counter point to whatever point the opponent had. Over time, do you expect the Western economies to start looking more like China as it does today or China to look more like Western economies as they do today? If so, where would they converge?

JB: The easy answer is it’s going to be somewhere in the middle because in the process of competition both are going to end up shifting. To be slightly more provocative, perhaps, I’d say that if you want to see the world as it might be in the future, don’t look at Beijing, don’t look at Washington. The future is Hong Kong.

BC: Why is that?

JB: I have a few reasons for saying that. First, I’m thinking structurally. Some have made a comparison, and it’s a beautiful comparison, that roughly speaking land is to Hong Kong what oil is to Saudi Arabia.

Hong Kong has extraordinarily valuable land. They may not have too much of it, but what it has is in extremely high demand. Of course, as soon as you talk about property prices, you have to talk about financial systems. As we’ve seen here in the United States, credit is quite highly associated with property prices and vice versa. If you’re going to talk about land, you’re talking about financial systems. If you’re talking about financial systems, the question on everybody’s mind worldwide has to do with the soundness of different financial systems. And, to the degree that the entire financial system worldwide is fairly integrated, how is this going to play out?

Because the land story has been so central in Hong Kong, it may have some lessons. First, you can look at the United States 2008. We had subprime. We had a land crisis that morphed into a financial sector crisis. And on the other side, look at the PRC. One of the questions here is whether they have gotten themselves into a situation where land and the financial system are wagging the entire dog of the economy. To the degree that we’ve seen land and finance drive things in Hong Kong, the Hong Kong experience may have some useful lessons for other economies in the world going forward.

The second answer is that Hong Kong, as Lynn Pan might say, is where maritime China meets earthbound China, where East met West. It is really, to some degree, a cosmopolitan nexus in the world, and so a useful object of study in a lot of different ways.